The Political Economy of Change and Continuity in Korea by Seungjoo Lee & Sang-young Rhyu

Author:Seungjoo Lee & Sang-young Rhyu
Language: eng
Format: epub
ISBN: 9783319714530
Publisher: Springer International Publishing

3.5 The Korea Development Bank: Return of Developmental State and Reversal of Privatization

KDB, which was established as a public enterprise in April 1954, was a necessary core financial institution for South Korea to pursue its developmental state. It was a crucial channel of policy loans, treasury loans, and investments that intensively invested its limited financial capital in strategic industries. Immediately after the Korean War, KDB’s core project was economic reconstruction, and after the 1960s its major projects were providing export financing for companies, facilities financing, and inviting foreign capital to invest in heavy and chemical industrialization. At the time, KDB was an essential organization in South Korea that promoted government-led export oriented industrialization in poor conditions with undeveloped financial and capital markets.

Regardless of this positive role, KDB was unsuccessful in actively coping with changes in domestic and international financial markets. So, it was under a significant amount of pressure to advance its business areas and reform. The 1997 Asian financial crisis in South Korea highlighted the vulnerability of the financial industry and management failure of chaebols. KDB was not free from these two criticisms. KDB was an axis of bureaucratic finance, which was indicated as the source of the opaqueness and inefficiency of the South Korean financial industry. The South Korean government and private enterprises depended on indirect financing to procure investment capital for industrialization through banks rather than the stock market. Financial bureaucrats and politicians were able to arbitrarily exercise regulatory power in the finance market for a long time. Moreover, there were no other incentives for the developmental state and bureaucrats to develop the stock market, and they did not hold specific policy or vision to do so. With this, the competitiveness of South Korea’s capital market was vulnerable. Direct intervention of the government in the finance market and banks was specified through intervention in personnel matters in arbitrary monetary policy and banks. As a result, banks did not have the motivation to evaluate business value and evaluate the likelihood of their loans being repaid, nor could they develop the capability to do so. This ensured that South Korean banks would be left behind in international competitiveness.

Right after the economic crisis, the South Korean government examined the financial health of banking institutions with the help of the IMF and the World Bank. Intensive reform was carried out as a result. As seen in Table 3.1, a total of 600 financial institutions closed. Among 1200 financial institutions, from 1997 to 2002, 467 were thrown out of the market, and 153 of those remaining were forced to merge with other healthy financial institutions.Table 3.1Closures and mergers of financial institutions in South Korea (1997–2002)

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